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U.S. dollar: Safe, though not sound

The dollar’s viability as the world’s reserve currency is under no serious threat because it faces no competition. This is the thesis of Desmond Lachman’s new piece in The American. Channeling Paul Volcker, he writes:

If the dollar is to lose its reserve status, as epitomized by the fact that more than 60 percent of the world’s foreign exchange and more than 85 percent of world trade is still denominated in U.S. dollars, some other currency would need to replace it. A close examination of the world’s other major currencies reveals that a currency is yet to emerge that offers the liquidity, depth of financial markets, and store of value than the U.S. dollar.

He later implies, and fairly so, that the euro is the only currency even close to challenging the dollar’s dominance. But European politics, he notes, is experiencing “a disturbing fragmentation” and the continent’s recovery lags far behind that of the U.S. Most notably, Europe continues to see record-high unemployment rates, which presently remains around 12 percent for the region as a whole, and up to 27 percent in struggling economies like Greece and Spain (how any country economy can long survive a 27 percent unemployment rate is beyond me).

I think Lachman’s thesis is fair. For all the harms done to the dollar by the Federal Reserve, people need a currency. Until another major economy proves to be as robust as the American, it’s silly to think people will quit using the dollar. If anything, I think a decentralized network of commodity-based (or dare I say crypto-) currency is more likely to slowly chip away at the dollar’s power than any single other world currency. What these will look like, I cannot say.